Two different types of Drawdown?

coyrls

EdGasket wrote: »

From that link HMRC triggers include:

"When considering whether a significant increase has been made, contributions paid during the tax year in which the tax free cash is paid, the immediately preceding two tax years and the immediately following two tax years are included"

and

"The recycling was pre-planned. Pre-planning may take place either at or before the time the tax free cash is paid e.g. the individual significantly increases contributions in anticipation of receiving the tax free cash sum."

Looks like I'm stuffed then as far as taking a tax-free lump sum; I was not aware of these 'rules'. Maybe I will not be affected if a just take out a little at a time under flexi-drawdown? Can anyone comment?

OK the way I read that (and it’s just my interpretation), is that they are looking to see if the contributions increase after you have taken the lump sum. That is why they are comparing contributions for the two years after taking the lump sum to the contributions two years before the lump sum. I think your second quote relates to increasing contributions prior to taking the lump sum in an attempt to “mask” the contributions made after the lump sum. If you don’t make any contributions after taking the lump sum, then you can’t be “recycling”, regardless of the contributions you made prior to taking the lump sum.

EdGasket

coyrls - what you say sounds plausible. I must admit I read it like they were looking out for people suddenly topping up their pension only to immediately withdraw a larger tax-free lump sum and effectively get their money-back plus a government top-up. I wish it were clearer so that there is no doubt. How is one supposed to make plans?

coyrls

EdGasket wrote: »

coyrls - what you say sounds plausible. I must admit I read it like they were looking out for people suddenly topping up their pension only to immediately withdraw a larger tax-free lump sum and effectively get their money-back plus a government top-up. I wish it were clearer so that there is no doubt. How is one supposed to make plans?

Hopefully we will get confirmation from somebody more qualified than me but I have always taken “recycling” to mean using the tax free lump sum to make additional contributions.


I wouldn’t expect making higher contributions prior to taking a tax free lump sum (which is often advised and something that I have done) to be caught under recycling rules.

coyrls

From the horse's mouth:

Circumstances where the recycling rule does not apply

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104925.htm

EdGasket

" The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way."

It still seems a minefield. Surely increasing the pension contributions significantly before taking the tax-free lump sum could be seen as being an 'indirect' way of taking a larger lump sum? Presumably it is safer not to take the 25% tax-free lump sum in one hit, then you won't ring any alarm bells?

coyrls

EdGasket wrote: »

" The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way."

It still seems a minefield. Surely increasing the pension contributions significantly before taking the tax-free lump sum could be seen as being an 'indirect' way of taking a larger lump sum? Presumably it is safer not to take the 25% tax-free lump sum in one hit, then you won't ring any alarm bells?

No the direct and indirect refer to the funding of the contributions. So say you took out a loan and used the loan to increase contributions and then used the tax free lump sum to pay off the loan, then your contributions would have been indirectly funded by the lump sum. Getting a larger lump sum is a valid reason to increase contributions and is not considered recycling, as the quote says "A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum."

EdGasket

So how the hell are they going to know how I funded my increased contribution and whether it was from any loans I took out, my savings, or gifts from family? Seems too woolly to prove either way. Would be a nightmare to sort out surely?

coyrls

EdGasket wrote: »

So how the hell are they going to know how I funded my increased contribution and whether it was from any loans I took out, my savings, or gifts from family? Seems too woolly to prove either way. Would be a nightmare to sort out surely?

I would imagine that if they decided that something was suspicious, the source of your increased contributions would be what they would investigate. I'm not going to lose sleep over this; if required I can demonstate the source of my increased contributions and that the tax free lump sum is not required to fund those contributions.

EdGasket

Well I won't lose sleep over it though I am less confident than you. Once HMRC get their teeth into you there is just no let up whatever evidence you can or cannot produce does not seem to cut much ice with them. I have been on the losing end of HMRC disputes before; not at all pleasant either personally or financially.

Just seems a crazy idea to try and police whether pension contributions were intended to be funded by an increased lump sum or not. Of course if I know I am going to come into a large tax-free lump sum fairly soon, I can put more in the pension to increase that lump sum that I otherwise could not. So do I break the rules or not? I have no idea and I suspect it ultimately depends on luck and who, if anyone, at HMRC looks into it.

mgdavid

Have you not heard of the phrase 'staying under the radar'?
'normal' salaried people who are taking PCLS of just a few tens of thousands are highly unlikely to attract individual attention from HMRC. If you suddenly piled in half a million and took a PCLS in 6 figures then that might be different.